Closer to Real-Time for Real-Time Payments
What handles real-time payments? In 2017, the veil was removed from an interbank payment system that provides close settlements rather than automated clearinghouse (ACH) transactions the next day. The real-time payment network (RTP) has worked and is ready for adoption by banks, businesses, and consumers.
Four years later, the RTP Network can teach many success stories, but anywhere close to the adoption rates expected when it debuts. Approximately 130 banks are in the network, up from a handful in 2018. Taken together, they could reach 60% of checking demand deposits and savings accounts. That’s a far cry from 4,430 commercial banks, 640 savings institutions, and 5,160 credit unions in the United States.
The Clearing House (TCH), an affiliate and payment organization, developed and operates the RTP Network. In May, the CEOs of 23 leading financial institutions that own TCH signed a letter promises to show and pay fees through the network. The CEOs of two of the three major U.S. payment technology providers, Jack Henry & Associates, and Fiserv, also signed the letter. The other major service provider, Fidelity National Information Services, passed the opportunity.
Promises news, but don’t put out the champagne anyway. Despite the benefits of real-time payments, most of the action involves individuals paying and the amount is smaller. In other words, large corporate B2B transactions are not of interest to CFOs.
One reason for the hesitation is the need to customize enterprise resource planning (ERP) systems to accommodate real-time payments, a hurdle that the RTP Network works to overcome.
Another challenge is doubting the value of a system that speeds up payments in just a single day. As CFO Steven Horowitz of the managed home health care provider puts it,
To be fair, speed is just one of the advantages of RTP. Others include 24/7/365 access (banks are always online to process transfers); immediate confirmation; and finally in settlement – a sending bank cannot withdraw or remember a payment. Additional benefits include the ability to send a “request for payment” and receive payment data along with the payment, certifying that an amount has been sent and received.
To be fair, speed is just one of the advantages of RTP. Others include 24/7/365 access (banks are always online to process transfers); immediate confirmation; and finally in settlement – a sending bank cannot withdraw or remember a payment.
These benefits are significant, but the system needs to iron out some kinks. “We’re still early on in this story – probably chapter two in a six -chapter book,” said Zachary Aron, a principal and head of worldwide payments at Deloitte Consulting. “We’ve passed the point where it’s proven that the system works and does what it promises. It’s just that building the infrastructure takes longer than [they thought it would]. “
Encounter Real-Time Reality
Real -time payments involve three parties – a receiving bank, a sending bank, and an initial fund Federal Reserve Bank account. Within the RTP Network, a credit transfer payment message is initiated by the sending institution. When received, payment is completed near real-time.
With the first U.S. real-time payment in November 2017, BNY Mellon successfully transferred $ 3.50 from one account to another U.S. Bank account. A year later, four other banks – Citibank, JPMorgan Chase, PNC Financial Services Group, and SunTrust – could execute inter -bank payments within three seconds. At that time, the payment limit was $ 10,000.
Today, there are 130 banks that have implemented real-time payments to a $ 100,000 limit. Is 130 banks a minuscule number, given to thousands of banks across the country? “It’s not 100%, but it’s still important,” said Russ Waterhouse, TCH executive vice president of product development and strategy.
Asked how many businesses send and receive payments from other businesses in the network, Waterhouse said, “That B2B data doesn’t exist, but my definition is that 60% is a good proxy, if not higher, because some of the largest banks in corporate banking operations are live on the network.
Waterhouse provided introductions to two companies that use the RTP Network. Both companies have served on the TCH advisory board and participated in use cases. Neither is sending or receiving real-time payments on a live basis.
“We do transactions in a trial mode,” said Michael Riggin, vice president of banking and chief risk officer at Global Holdings, a provider of consumer settlement strategies and technologies. “It worked as expected, but we haven’t implemented it yet. The challenge is bank adoption.”
Global Holding has 600,000 consumers and 1,000 creditors using its tech platform. “Although our three banks are RTP -enabled, we cannot reach all of our customers because their banks are not RTP -enabled to receive a request for payment,” he explains. “We’ll get there, but we’re not there yet.”
Michigan State University (MSU) participated in a use case for emergency loans to students. The university’s federal credit union provided funds through the RTP Network.
“This is a great solution, as long as the bank used by the student is an RTP participant,” said Jeff Rayis, MSU’s director of finance and financial management. “The market is waiting for more acceptance.”
The reception is coming up, Waterhouse maintains. He mentioned the importance of Jack Henry & Associates and Fiserv’s decision to restore the network. “Through these two channels, we can access almost 2,000 financial institutions and almost 70% of DDAs,” he said. “Banks that want to join the network already have a technical path to do that.” Both tech providers will be live on the network sometime this year.
Are They Going?
Across the Atlantic, the RTP building blocks are already in place. “Ang [United Kingdom] and Europe is ahead of the US in moving from ACH checks to RTP, ”said Andy Lilley, vice president of accounts receivable automatically at BlackLine.
“The main driver, we explained, is not speed but working capital management. You don’t pay earlier; in fact, you get the chance to make the late payment decision that you need to make – literally until the last minute.” – Andy Lilley, vice president of accounts receivable automation, BlackLine
Lilley’s career includes 13 years at Bottomline Technologies, the UK’s largest provider of payment processing technology.
“I remember talking to CFOs and heads of finance about real-time payments, and they always asked,‘ Why do we want to pay people earlier? ‘”Lilley said.” The main driver, we explained, is not speed but working capital management. You don’t pay earlier; in fact, you get the chance to make the late payment decision that you need to make – literally until the last minute. “
As an effect, a CFO can buy time, determining when it is most appropriate from a cash -flow perspective to pay a supplier or another customer – sooner, on time, or later.
“During the pandemic, CFOs were not dependent on cash coming into the business,” Lilley said. “Consequently, the question is,‘ How far away on the road can I include [accounts payable]? ‘The longer you take to make this decision, the better chance you have of not over -expanding the organization’s credit lines. You’re also buying more time to work out payments to your customers. That’s important for a CFO to make an informed decision around working capital. “
To overcome the US resistance, TCH works with ERP vendors to enable real-time network payments by using application program interfaces (APIs), which allow two applications to communicate with each.
APIs offer a cost-effective path for CFOs to consider real-time payments in a B2B context. Convincing thousands of other commercial banks, credit unions, and savings institutions to become members of the RTP Network, however, remains uphill.
Asked what handles financial institutions, Rayis pointed to MSU’s 24/7/365 network payment flow. “Many banks are accustomed to Monday to Friday ACH Networks; they are not configured to post and track transactions in near real-time at all times,” he said. “They’ll get on board eventually for competitive reasons. Like I told our credit union, ‘If you don’t do this, you’re going to lose clients.’ ”
Even though all the world’s banks went real-time, Horowitz, the CFO at CareCentrix, remains skeptical about the opportunities inherent in a system that limits payments to $ 100,000.
“I see the opportunity for smaller midsize companies and those in [business-to-consumer] space where payments are lower, but for companies that make larger transactions, they still have to go through a different mechanism, ”Horowitz said.
His point could be moot in the first quarter of 2022 when RTP Network reviews a proposal to raise the limit to $ 1 million. If it gets the green light and more banks join the network, another barrier will disappear.
“We saw three times the number of real-time payments last year than we saw in the previous three years,” Deloitte’s Aron said. “I don’t know if Moore’s Law is playing out, but I see momentum building. In five years, it’s going to be par for the course.”
Russ Banham is a nominated financial journalist and Pulitzer Prize -winning author.